Tuesday, December 20 2022
After years of what some insurers have labeled half-measures, Florida lawmakers appear to be on the cusp of delivering “historic” and “transformational” reforms that would end one-way attorney fees, banish assignments of benefits and offer state-backed reinsurance at a discount.
House Bill 1A and Senate Bill 2A were posted late Friday, just three days before a special legislative session that begins today. The bills were met with widespread applause from insurance industry leaders, attorneys and consultants.
“The proposed legislation sends a strong message that Florida is serious about stabilizing the property insurance market and creating an environment to attract capital and create more options for Florida’s insurance consumers,” the Florida Association of Insurance Agents said in a statement.
After nine insurer insolvencies in the last three years and spiking premiums across the state, the bills aim to tackle the major cost drivers, including the incentives behind what insurers have dubbed runaway claims litigation. They also would address other cost factors and provide some consumer protections that would force insurers to pay or deny claims more quickly, to be more judicious about demanding the appraisal process in claims disputes, and face new scrutiny from regulators.
An attorney who represents property owners said the proposals take away policyholders’ rights and eliminate longstanding safeguards designed to level the playing field between insureds and well-heeled insurance companies.
Here’s a look at the bills’ proposed changes:
Mandatory Flood Insurance for Citizens’ Insureds
The measures would require policyholders of the state-created Citizens Property Insurance Corp. to also purchase flood insurance. The bills provide a timetable for phasing in the requirement, with more expensive properties needing it first, by March 1, 2024. All policies would need flood insurance by March 2027, regardless of the property’s elevation or location.
The idea was discussed in the Capitol in the mid-2000s but never gained traction. Now its time has come, said Scott Johnson, a longtime insurance consultant and educator who recently broached the possibility of reviving it.
“I was surprised that’s in the bill now,” Johnson said Sunday.
He has argued that insureds who receive payouts on water losses after a storm are less likely to file suit over whether the damage was from wind or floodwaters, which could help reduce Citizens’ staggering litigation defense costs.
“Most of the people in Citizens are probably candidates for flood insurance and it’s really just a prudent way to make sure claims can get paid, because in the end, a lot of those claims were not wind claims, they were flood claims,” said Fred Karlinsky, an insurance defense attorney and lobbyist for the industry.
The 20% Rule
The bills also revive a plan that would essentially force Citizens’ policyholders to switch to a primary market carrier if that carrier’s premiums are no more than 20% higher than Citizens’, upon renewal. Citizens’ premium increases are limited by law – the main reason the insurer has become the largest carrier in Florida, with some 1.2 million policies in force.
A similar provision was included in SB 1728, which was approved by the state Senate in the regular 2022 legislative session. The bill died when the House did not approve it before the 60-day session came to a close.
The new bill also would allow Citizens to combine its three accounts (personal lines, coastal and commercial) into one. That would let Citizens access its entire surplus to pay claims and would limit the potential surcharge or assessment on policyholders – from one charge per account to a single surcharge, if the corporation runs a deficit.
Expansion of Arbitration
The bills would codify what a few insurers have already adopted: binding arbitration clauses. Insurance carriers would not be allowed to require arbitration as an alternative to litigation unless it is clearly explained in a separate policy endorsement, the insured is offered a premium discount in exchange, and the policyholder signs a form accepting the clause.
One-way Attorney Fees
On the biggest cost drivers, insurers have said for years, is Florida’s claimant-friendly one-way attorney fees statute, which requires insurers to pay the plaintiffs’ legal fees if the carrier loses in court. The law has been in effect, in one form or another, since 1893, and is more akin to the English rule of law, according to a legislative staff analysis of the newly drafted bills. In 2016, a famous Florida Supreme Court decision underscored the legitimacy of the practice. That, along with fee multipliers, have caused fees to explode in recent years and has been the incentive behind Florida’s out-of-control claims litigation industry, insurance advocates have said.
HB 1A and the nearly identical SB 2A address legal fees head-on, stating flatly that the one-way attorney statute shall not apply to insurance claims litigation. A court could award fees to the prevailing side after a dispute is adjudicated, the bill’s sponsor explained in a Senate committee meeting Monday.
Assignments of Benefits
The bills also would prohibit AOBs for residential and commercial claims, a move that a growing number of insurance executives have called for. Assigning benefits to restoration companies is one of the biggest cost escalators because it gives contractors an unnatural incentive to inflate estimates and scope of repairs, critics have said. And when insurers balk at the claims, the assignees are often quick to sue.
For years, insurance defense attorneys have argued that Florida’s statutes make it too easy for plaintiffs to file bad-faith actions against insurers, long before a case has been fully adjudicated and even if claims have been paid. The special session bills would bar bad-faith claims until after a court has decided that the insurance company breached the policy contract.
Faster Action on Claims
The proposed legislation would cut the time allowed for insurers to pay or deny claims, from 90 days to 60. The Florida Office of Insurance Regulation could extend the time in states of emergency or if the insurer suffers a cyber attack or other computer system failure.
The bills also reduce the time that insurers have to review and acknowledge a claim communication, from 14 days to a mere seven. Inspections would have to be done in 30 days, even after a hurricane. All of that could force insurers to hire staff to meet the new demands, or at least to become more efficient.
Insureds also would have less time. Instead of two years, as was required in 2021 legislation, policyholders would have only one year after the date of the loss to file new or reopened claims. For supplemental claims, the deadline would be shortened from three years to 18 months.
More Regulatory Scrutiny
Insurers that unjustly compel claimants to turn to the appraisal process could have their certificates of authority suspended, face fines from the OIR, and be publicly named and shamed on the OIR website, the bills note. The staff analysis of the bills did not explain what prompted the section, and its inclusion surprised some industry insiders.
Insurers have said the appraisal process can provide a fair method method to determine the cost of damage to a property, with the use of three independent appraisers. But a plaintiffs’ attorney said that some property insurers have abused the process by underpaying a claim, then immediately invoking the appraisal route, which delays resolution and adds expense for insureds.
“This practice ignores the obligation to adjust the loss with the insured and instead allows an insurance company to avoid its duties to try and resolve the claim,” said Gina Clausen Lozier, a plaintiffs attorney in West Palm Beach. “The appraisal process often requires an insured to incur additional costs for appraisers and an umpire which may have been unnecessary if the insurance company had taken the opportunity to properly adjust the claim with the insured.”
Karlinsky said he didn’t know if appraisals had become such an issue. “I think the Legislature wants to put some guardrails around things and we understand the need to do that,” said Karlinsky, who, as a registered lobbyist, has represented almost two dozen insurers in recent years.
Under the bill, OIR also would have new authority to require more information in insurers’ quarterly reports, which currently includes policy counts, premium written and exposure by county. Many insurers have claimed that such data is considered “trade secrets,” leaving an incomplete picture for stakeholders, regulators and the public, critics have said. Regulators also would be able to subject insurers to a market conduct examination after a hurricane, the bills note.
The legislation, if signed into law, also would provide OIR with an extra $1.76 million per year to hire new staff to keep up with its new responsibilities. The move may address concerns that some lawmakers expressed at the May special session, that OIR was understaffed and was not aggressive enough in bird-dogging struggling insurance companies.
Crucially, the FAIA leadership and others said, SB 2A and HB 1A would provide a new layer of state-funded reinsurance – at a significant discount from what the market offers. Reinsurance prices for Florida property carriers have soared by more than 80% in recent years and are expected to rise again in 2023, according to market reports and the bill analysis. Those costs have been a significant factor behind several recent insolvencies, troubled carriers have said.
The bills would establish the Florida Optional Reinsurance Assistance Program, or FORA. The coverage would begin at the Florida Hurricane Catastrophe Fund’s attachment point, currently at about $8.5 billion for the industry, and would cover up to $5 billion in losses below that. Rates would range from 50% to 65% lower than private reinsurance market rates. It would be funded with $1 billion in state funds and from premiums paid by participating insurance companies.
The less-extensive Reinsurance to Assist Policyholders (RAP) fund, established at the May special session, would continue for at least another year.
FAIA President Kyle Ulrich said the new program will help stabilize the Florida property insurance market. Karlinsky said lawmakers are using the tools they have, but that the FORA plan may not go far enough.
What the Bills Don’t Address
Somewhat surprisingly, the measures do not address two elements that public officials and insurers have said are crucial to putting the brakes on claims litigation and outsized loss adjustment expenses: limits on public adjusters, and on ways to make it easier for insurers pay actual cash value, as opposed to replacement value, for damaged structures.
Florida’s chief financial officer, Jimmy Patronis, and others have said that southwest Florida was practically overrun with public adjusters just days after Hurricane Ian damaged thousands of homes in the area, and he called for slashing fees that adjusters can charge and for more prosecutions of those who violate the law.
“Florida’s problem won’t be completely solved until you get public adjusters out of there,” Johnson said.
The actual-cash-value issue was partly addressed in May, when lawmakers revised statutes that had required full replacement of roofs when only small parts were damaged.
The new bills, some of the first to be considered by the newly elected 2023 Legislature, were said to have been drafted by House and Senate leadership, with input from the Florida governor’s office. But industry insiders pointed out that state Sen. Jim Boyd, R-Bradenton, the longtime chair of the Senate Banking and Insurance Committee and an insurance agent himself, is the sponsor of SB 2A and likely crafted most of the bill language.
Boyd was instrumental in crafting the two bills that moved quickly through the May special session. And if next week is anything like that session, the bills will see few changes in committee or on the floor. With Republicans having a larger majority now than in May, the measure are expected to sail quickly through the chambers, with a final gavel as soon as Wednesday.
Both chambers convene today at 10:30 a.m. and Senate committee meetings start at noon.
The FAIA cautioned stakeholders not to expect an immediate improvement in insurers’ finances or a rapid drop in insurance premiums. Karlinsky noted that whatever reforms are passed this week, they will probably be challenged in court by contractors and trial lawyers, a process that could take a few years to resolve.
“I would applaud the Legislature and the governor for trying to fix something that has been plaguing Florida citizens for too long, and hopefully this will stem the tide of some of the ills we have faced for many many years,” Karlinsky said, calling the proposed legislation “pretty transformational.”